Suderman Says: Will announcing a peak in rates be a mistake?

Financial markets continued to rally after yesterday’s 25 basis point rate hike, as the central bank suggested an end to rate hikes is near by removing a line from its statement about "ongoing increases." Federal Chair Jerome Powell did his job, keeping Federal Open Market Committee (FOMC) members on the same page, while speaking with confidence regarding the economy and the banking sector. Will announcing a peak in rates be a mistake?

Reading the Fed’s tea leaves

• Wall Street didn’t like his talk of lingering inflation, but there was really nothing new in his comments to either raise fears regarding future rate hikes, or to spur panic regarding the health of the regional banking system. The FOMC’s official statement replaced words stating that inflation “has eased” with words stating that inflation “remains elevated”
• Powell’s intention indicated that the FOMC remains unanimous in its determination to bring inflation down to the 2% mandated level, and that it will stay the course until that job is done – meaning rates remaining higher for longer with no downturn until at least 2024
• He emphasized that “inflation is too high, and the labor market is too tight.” He went on to say that “the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy”
• He added that the Fed was likely near a pause for the health of the banking system. The Fed’s dot plot graphic of where rates should be reflected expectations of at least one more rate hike this year, followed by up to three reductions in 2024. However, he indicated that there was currently no support on the committee for cutting rates this year
• The Fed’s statement replaced “ongoing increases may be appropriate” with “some additional policy firming may be appropriate.” Right or wrong, the market interpreted that change in wording as being dovish
• Finally, Powell clarified in his comments to the press that the change in wording was due to the uncertainty currently in banking, as he acknowledged stresses in that sector. The FOMC will maintain the pace of shrinking its balance sheet or reducing the amount of lingering stimulus in the economy

Markets stabilize

• Equity markets continued to rally with the broad S&P 500 up 0.6% at the time of writing, and the tech-heavy NASDAQ was up 1.2%
• The VIX, Wall Street’s fear index, rose marginally to 22.2
• The dollar index continued to decline, down to 102.4
• Yields on 2- and 10-year Treasuries fell back to 3.87% and 3.44%, respectively

Commodities sell-off as bullish positions are closed out (we think)

• Grain and oilseed markets were hit by significant sell orders along with crude oil and the dollar
• There were no clear headlines triggering the selling, leading to speculation that it may have been tied to a fund needing to liquidate positions connected to problems in the banking sector
• This demonstrated how the grain and oilseed markets are tied to the outside markets when it comes to the impact of money flows
• The bigger story today is the chart failure in soymeal and soybeans as the funds continue to liquidate previously massively long positions on the bearish chart signals
• Hard wheat prices are faring better than soft wheat in spread trading due to the supply risks currently in those markets

China’s charm offensive moves on to Brazil, after Russia

• China’s President Xi Jinping charm offensive shifts to another BRIC nation – Brazil
• He meets with Brazil President Luiz Inacio Lula da Silva next week
• The Brazilian president will bring along 240 business representatives, including 90 from the agricultural sector
• Observers expect China to strengthen its commitment to import meat and grain from Brazil as it moves away from dependency on the US
• Look for Xi Jinping to also do what he can to move Brazil toward adoption of the yuan as the currency of trade, while also making more commitments to Brazil’s infrastructure as part of China’s Belt & Road Initiative
• China is rapidly moving away from its need to depend on agricultural imports from the US, while it has yet to reduce its dependency on the exports of consumer goods to the US

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com